With a price-to-earnings (or "P/E") ratio of 23.1x Shriram Pistons & Rings Limited (NSE:SHRIPISTON) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 49x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Shriram Pistons & Rings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Shriram Pistons & Rings
How Is Shriram Pistons & Rings' Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Shriram Pistons & Rings' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The latest three year period has also seen an excellent 149% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader market.
In light of this, it's understandable that Shriram Pistons & Rings' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Shriram Pistons & Rings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Shriram Pistons & Rings that you need to be mindful of.
You might be able to find a better investment than Shriram Pistons & Rings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Valuation is complex, but we're here to simplify it.
Discover if Shriram Pistons & Rings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.